Boston, USA, 14 July 2009. It is often said that those who do not remember the past are doomed to repeat it. With economics it's no different, considering the world has experienced dozens of crashes and recessions, undoubtedly caused by acquisitive traders and lawmakers with few memories of the past. So let us review past crashes - hopefully we won't repeat them.
When Harvard's James Stock introduced the term "The Great Moderation" in 2004, he led many to believe that history indeed was irrelevant. The theory was that technology, a wiser central bank policy, and more open markets for goods and labour dampened the effect of any economic cycles.
A climate of easy money, low inflation, consistent growth, and low-risk developed. All that Econ 101 stuff you learned about Germans burning money instead of firewood and the pains of the Great Depression was just history - it wasn't happening to us.
Whether or not "The Great Moderation" directly gave rise to irresponsible legislators, overzealous investors, and creative accountants is irrelevant. Arguably, these are human traits that always have existed and always will. But as they converged and grew, signs emerged. Long Term Capital Management collapsed in 1998. The dot-com bubble popped in early 2000, and the next year Enron died. Warren Buffet saw it: In 2002 he made a prediction about derivatives, "... these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear... These are financial weapons of mass destruction."
Once Bear Stearns failed almost two years ago - in August of 2007 - and the subprime and credit problems exploded, it was obvious there was no such thing as a "Great Moderation".
Let's take a look at history and some of the crashes, panics, failures and falls of the past 350 years or so.
- 1637 - Tulip mania damages the futures market and Dutch trade in general.
- 1720 - French and British stocks of firms cashing in on New World resources hit bottom.
- 1797 - Reserves in the UK fall low creating a monetary crisis. BOE puts a hold cash payments creating widespread public panic.
- 1810 - English credit crunch.
- 1819 - Only 43 years old, the US experiences its first major financial crisis.
- 1825 - London stock market panic from over-speculation in Latin American investments.
- 1836 - US real estate speculation causes stock markets to crash in the UK, Europe, then the US.
- 1847 - A credit crisis and bank panic ensue when railroad stock prices crash in France and the UK.
- 1857 - During the Civil War a US credit crisis crashes equity prices. All nations that trade with the US are affected.
- 1866 - "Black Friday" happens from railroad speculation. A bank panic starts which leads to lack of credit.
- 1873 - Vienna stock exchange collapses, causing the "great stagnation" on a global scale and lasts until 1896.
- 1882 - In France, Union Generale goes bankrupt causing banking crisis and market crash.
- 1890 - The UK's oldest bank, Barings, nearly collapses from its exposure to Argentine debt.
- 1907 - US bank panic spreads to France and Italy after stock market collapse.
- 1921 - Commodity prices crash.
- 1923 - Hyperinflation in Germany starts monetary crisis.
- 1929 - "The Great Depression" begins after equity crash.
- 1931 - Financial crises experienced by the UK, Japan, Germany, and Austria.
- 1933 - Gold standard given up by the US, starting panic in the banking system.
- 1966 - US credit crisis creates deflation and huge economic slump.
- 1973 - World financial crisis begins after OPEC quadruples the price of oil.
- 1982 - Global credit crunch prevents many developing countries from paying their debt
- 1987 - Bond and equity market crashes.
- 1989 - Japanese bubble.
- 1989 - Junk bond crisis.
- 1992 - French Maastricht Treaty sparks crisis in European Monetary System
- 1994 - Major bond market correction.
- 1995 - Mexican financial crisis caused by the peso's peg to the dollar during excessive inflation.
- 1997 - Asian financial crisis creates exchange rate and banking crisis, created from stock market and real estate speculation, along with many Asian currencies pegged to the US dollar.
- 1998 - Russia defaults on payment obligations during major financial crisis.
- 2000 - Dot-com bubble pops, creating a massive fall in equity markets from over-speculation in tech stocks.
- 2001 - Another junk bond crisis.
- 2001 - September 11 attacks create risk by hindering various critical communication hubs necessary for payment on the financial markets.
- 2001 - Economic crisis in Argentina, resulting in the government defaulting on payment obligations.
- 2002 - Bond market crisis in Brazil.
- 2007 - US real estate crisis causes the collapse of massive international banks and financial institutions. Equity markets take a dive.
- 2008 - Today's financial crisis punctuated by credit crunch and a frozen interbank market.
History tells us that opportunities will emerge as we recover from the current crisis, as valuations are low. But opportunistic trading is not the key to long-term value. However, we will inevitably return stronger and wiser than before - just don't forget the past.
Vladimir Gonzales, EconomyWatch.com